States May Be Forced to Achieve Higher Level of Reporting of Their Unfunded Liabilities

Proposals being created by the Governmental Accounting Standards Board will force most US states and towns to increase the level of unfunded liabilities they report on their balance sheets.

(June 23, 2011) — The Governmental Accounting Standards Board (GASB) is set to propose new state pension rules.  

The accounting board for governments is scheduled to propose the changes next month, which will aim to force states and local governments to better account for pension costs of their workforce while the employees are still on the job.

Additionally, under the proposed rules, schemes would be required to record their unfunded obligations over a shortened period averaging up to 15 years, the Wall Street Journal reported.

“We want people to be transparent and disclose exactly what it is they’re doing, and the market will make their judgments based on that,” GASB Chairman Robert H. Attmore said at a Washington conference sponsored by the Pew Center on the States, according to the WSJ. “The economics don’t change,” he said, adding that the change would make it easier for investors to compare public pension plans across states.

Currently, governments are not required to show their unfunded pension obligation as a liability on their balance sheet. However, GASB is proposing to make the amount of governments’ pension shortfalls clearer to investors.

Adding to the move to improve pension accounting, a recently released Congressional Budget Office (CBO) brief suggests that American public pensions should alter the way they calculate plan liabilities, asset values, and funding ratios. According to The Underfunding of State and Local Pension Plans, public pensions should use a fair-value method that incorporates a discount rate used on future cash flows to discern their liabilities to future workers, as opposed to the current GASB guidelines.

“For assets, the fair value is what an investor would be willing to pay for them—that is, the current market value (or an estimate when market values are unavailable); it is not the averaged, or smoothed, market values that are reported under GASB guidelines,” according to the brief. “For pension liabilities, the fair value can be thought of as what a private insurance company operating in a competitive market would charge to assume responsibility for those obligations.”

To see aiCIO’s profile of the New York City pension system – and how pension accounting is creating a hidden liability nation-wide – click here.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742